Phoenix Sells $300 Million Amid Pension Push: Muni Credit

May 16 (Bloomberg) -- Phoenix, facing pension costs that
have doubled in six years, may become the largest U.S. city to
put new workers in 401(k)-style plans if voters pass a ballot
measure in November.

Backers of the plan say a move last year to roll back
pensions didn’t go far enough to curb retirement expenses, which
swallowed $218 million, or 22 percent of Phoenix’s general-fund
expenditures in the year through June 2013, up from 11 percent
in 2007, budget documents indicate. Standard & Poor’s cited the
costs in stripping Phoenix of its AAA rating in December.

Investors get to weigh in on the sixth-most-populous city’s
fiscal wellbeing next month, when Phoenix plans to sell $297
million of debt. The state’s capital city still has time to get
a handle on its pension obligations, said Todd Curtis, who
manages the Aquila Group of Funds’ $271 million Aquila Tax-Free
Trust of Arizona.

“Pensions are a growing concern within the credit analysis
of any city in the country,” Curtis said from Phoenix. “Being
an Arizona buyer, I am not too worried about Phoenix. They have
a long history of taking steps to balance their budget.”

Pension Deficit

Local officials nationwide are contending with pension
deficits exacerbated by the recession that ended almost five
years ago. The 25 most-populous U.S. cities have more than $125
billion less than needed to meet promises to retirees, according
to Morningstar Inc.

Unfunded obligations for pensions and retiree health care
are crowding out spending on schools, police and libraries, Pew
Charitable Trusts said in a March 2013 report. Pension costs
have helped tip Detroit and the California cities of Stockton
and San Bernardino into bankruptcy since 2012.

Phoenix pensions are 61 percent funded, trailing the median
of 75 percent for the 25 largest cities, Morningstar said in a
December report. The proportion of Phoenix’s spending going
toward pensions is the group’s third-highest, trailing
California’s San Jose and San Diego, according to Morningstar.
Voter-approved changes in March 2013 should ease the pressure on
Phoenix, the company said.

Phoenix Rising

The city of about 1.5 million has rebounded from the
recession, which led to the smallest municipal workforce in 40
years and cuts to parks, recreation and cultural facilities, Pew
said.

Home prices in Phoenix reached a five-year high in
November, although they’re still down almost 40 percent from a
2006 peak, according to the S&P/Case-Shiller property-value
index.

Phoenix balanced its budget last year as the rebounding
economy boosted revenue, allowing it to restore police and fire
services, pool and library hours and programs for youth and
seniors. The city cut services to deal with a $277 million
budget shortfall two years earlier caused by declining tax
revenue, according to the city’s 2013 fiscal report.

Pension costs threaten to reverse the progress, Jim Waring,
the vice mayor, said in an interview.

Benefit Crossroads

Waring, a Republican, supports the November ballot measure
to cap pension benefits available to current employees -- a
measure intended to curb padding of benefits through late-career
raises and special pay -- and to put new civilian hires into a
401(k)-style system rather than a defined-benefit pension. The
401(k) is a tax-deferred retirement account that workers manage
themselves.

Savings would total $150 million in the first 10 years,
said Scot Mussi, executive director of the Arizona Free
Enterprise Club, which backs the measure. City officials haven’t
produced an estimate.

Phoenix would be the most-populous city to replace pensions
with 401(k)-type accounts for new hires, said Jordan Marks,
executive director of the union-backed National Public Pension
Coalition. Voters in San Diego approved such a system in 2012,
and it went into effect that year.

“Where we’re going to be in 20 years is a potentially
unsustainable path,” Waring said. “We’re trying to get ahead
of the curve.”

Phoenix, which hasn’t offered general-obligation debt since
2012, plans to refinance bonds issued in 2003, 2004 and 2005,
said Treasurer Randy Piotrowski. The city plans to price the
bonds June 2, he said.

Highest Rating

Even after S&P downgraded Phoenix in December to AA+, its
second-highest level, Phoenix is still tied with Houston for the
highest rating of the seven most populous cities.

“Pension costs have been on the radar of all investors,”
Piotrowski said. “However, we haven’t heard any direct concerns
from investors.”

The pension change that voters approved last year -- which
increased employee contributions toward pensions and established
later retirement ages -- is projected to save $600 million over
23 years, the city’s then-acting chief financial officer, Neal
Young, wrote in the 2013 fiscal report.

The population of Phoenix, home of PetSmart Inc. and
Freeport-McMoRan Copper & Gold Inc., grew almost 3 percent from
2010 to 2012, according to the U.S. Census.

Waring said the measures, which were backed by Democratic
Mayor Greg Stanton, didn’t reverse the growth in pension
liabilities.

Stanton’s policy director, Seth Scott, didn’t return two
phone calls and an e-mail message seeking the mayor’s position
on the latest initiative.

‘Free Market’

The Phoenix Pension Reform Act is principally funded by the
Arizona Free Enterprise Club, according to its website. The
club, which describes itself as a “free market policy and
lobbying group,” raised $501,000 in 2012, all through
membership dues, according to its most recent tax filing.

City unions have formed the Arizona Retirement Security
Coalition to fight the measure. Money from outside Phoenix is
fanning the perception of a pension crisis to persuade voters to
hand over management of municipal retirement accounts to private
firms, said Frank Piccioli, president of the American Federation
of State, County & Municipal Employees Local 2960, which
represents about 2,200 city employees.

Marks of the National Public Pension Coalition was in
Phoenix this week planning how to defeat the measure. Marks said
Phoenix could set a “dangerous” precedent for stripping
municipal workers of guaranteed pensions.

Piccioli couldn’t name the funders of the drive to cut
pensions, and Mussi declined to name donors. Neither side of the
ballot measure has filed financial disclosure statements ahead
of a June 30 deadline.

“The long-term outlook is a very healthy pension system,”
Piccioli said. “We are not in crisis. This is not Detroit.”